Shared Services are a growing trend because allow multiple business units to use a single IT service capability. They aim to maximize utilization of resources, increase efficiency, reduce costs and also create opportunities for quality improvements. However, ineffective governance can undermine the benefits that organizations seek from shared services.
In this newsletter we will help you to understand the available governance options for IT shared services and what each entails and to decide which option to take given your current organizational circumstances.
Shared services implementations deliver substantial cost and quality benefits but the history also reveals some spectacular failures. According to Info-Tech research, 33% of shared services implementations increase IT expenditures and 11% worsen service quality. Companies across the globe report similarly high rates of failure. Ineffective governance plays a major role in the failure of shared services implementations. Common problems include a failure to encourage participation in the implementation, lack of accountability for implementation success, and no reconciliation of interests and business practices of the various participants.
Governance models for Shared Services
There are three main governance models for shared services, effective for specific organizations. The appropriate choice of approach is a key contributor to success: Enterpreneurial, Mandated y Market-based.
In the entrepreneurial model, the organization encourages BUs to make bilateral agreements to share services. The agreements are voluntary. One of the advantages of this model is the low governance cost and some level of sharing between BUs, but the low level of centralization discourages participation, limiting benefits. It is ideal for small organizations.
The entrepreneurial model imposes few governance expenses, but its key limitation lies in a low participation rate that limits savings.
The entrepreneurial model has the lowest participation rate of the three models because:
- The IT service resides in the serving business unit and its primary goal is to serve that business unit.
- While collecting chargebacks helps the service provider’s P+L, the service provider has other strategic objectives as well, for example, increasing market share or brand awareness.
- These other considerations will tend to shape the service provider’s capabilities more than the desire to provide services in exchange for chargebacks.
- Faced with services that cater to them only as a second priority, participants will use the service less than in other governance models.
The entrepreneurial model makes sense for organizations that cannot amortize governance expenses over large IT budgets, due to:
- Entrepreneurial model is a low-cost option. As the shared services are provided by existing IT divisions in different business units, less investment is needed to create this shared service. There is no additional cost to set up a shared services committee or other structure.
- For small organizations, the simplicity of the entrepreneurial model will play an important part: The cost of investing in a large-scale governance model can outweigh the benefit that a small organization experiences from shared services.
- This holds particularly true when the small organization is divided into a large number of business units. Then it becomes expensive and difficult to coordinate between the departments, and the benefit of large-scale governance appears small.
In this model, the organization mandates how a business unit should share its own IT services with other business units: the service type and level it will provide and the chargebacks it will receive. Mandated models involve varying levels of centralization, but the element of strong corporate control is the key element. One of the advantages of this model is the increased participation in the implementation due to corporate mandate, but governance must coordinate requirements of all participants by way of consensus. With a large number of participating BUs, the mandated model becomes difficult to orchestrate. However, the size of the BUs themselves is less important here. It is ideal for larger organizations with a few business units involved in the shared services implementation.
Large organizations can amortize governance expenses over a larger IT budget due to:
- Higher participation rate: The mandated model forces business units to get involved, leading to a high participation rate. The benefit of that participation (in absolute terms) is greater in larger organizations.
- Increased governance expense: Unlike the entrepreneurial model, the mandated model incurs the expense of a governance board that includes members from each of the participant business units. This is the cost of coordinating service across multiple business units.
- Scaling with the number of participants: The cost of the governance board grows rapidly with the number of participants, making this governance method expensive for organizations that serve a large number of business units. However, the mandated model can make sense even for large organizations if there are only a few BUs participating, even if the BUs are also large.
Early successes with undifferentiated services will encourage participants to embrace services with varying features and service levels later on. Start with undifferentiated services because allow the service provider to provide the same service for every participant. Some services only come in one size and color. An undifferentiated service creates the greatest cost savings, since the economy of scale for the process that drives the service exists across a large number of participants. With many service flavors, each process only serves a small number of participants. The initial success of an undifferentiated service will drive interest in more complex services.
In the market-based model, the organization creates a centralized IT business unit and allows it to contract with individual BUs to provide IT services. One of the advantages of this model is that the market forces drive efficiency in service selection and participation, but running a separate BU imposes an administrative burden. Since the administrative cost of a new BU is largely fixed, it will appear smaller for larger organizations with larger BUs. It is ideal for larger organizations with many business unites involved in the implementation.
The market-based model enables groups within the service provider BU to specialize in services to different business units:
- Service to a large number of customers: The centralized, independent approach of the market-based model makes it effective for serving a large number of customers. Unlike the mandated governance approach, the administrative cost of the shared BU does not increase directly with the number of participants. This is because the feature set is determined through the decision of the service provider, not through direct negotiation.
- Specialized groups for service flavors: When the IT department is a separate business unit, it can create sub-divisions specialized in handling services for specific business units.
- Fixed cost of administration: The shared BU has a fixed cost of administration that is best amortized over a large IT budget.
It is very importante to follow the steps associated with the appropriate model to ensure smooth implementation of the shared service and reduced internal resistance to the new service delivery methods. The steps will help you motivate participation, create accountability, and reconcile varying interests.
Ineffective governance will undermine the benefits of shared services
The participant resistance and service underperformance that IT managers experience is often the result of poorly planned and executed governance. Ineffective governance leads to:
- Resistance: With poorly defined incentives, business units (BUs) resist sharing their capabilities due to fear of unfair treatment. Failure to align BU interests with organizational strategy results in limited participation. Performance failures due to unspecified benefits cause BUs to lose faith in the implementation.
- Service underperformance: Failure to align individual incentives with the broader organization. Lack of accountability causes performance disappointments.
- DilettUX recommends three models for governance of shared services. Pick the one that works best for your organization and service scenario.
- The entrepreneurial model offers a low cost of governance but can limit participation in the shared service.
- The mandated model has high participation due to corporate mandate. However, the cost of negotiating service levels among a large number of participants can become prohibitive, especially as the number of participant business units increases.
- The market-based model leads to an optimized service offering for a large number of participants. The administration of an independent shared business unit imposes a large, but mostly fixed, cost.
Guardian.co.uk, March 15, 2011, “DfT seeks new shared services centre deal.” <http://www.guardian.co.uk/government-computing-network/2011/mar/15/dft-seeks-new-shared-services-centre-deal>
Silicon.com, December 16, 2008, “Department for Transport ‘incompetence’ over shared services.” <http://www.silicon.com/management/public-sector/2008/12/16/department-for-transport-incompetence-over-shared-services-39365414/>